Rent to own is an option for buying and selling property that is advantageous to both buyer and seller. Rent to own in particular has benefits for the buyer and this article will point those out, as well as why sellers can win from a rent to own contract as well.
The majority of home sellers wish to sell their house for a sum of money, and then move on to another property. Not many people consider the lease or rent to own option when selling a home. This is unfortunate as the benefits are numerous, particularly if the buying market has slowed down where you live.
Rent to own policies give a prospective buyer the opportunity to lease the property they are interested in rather than buy it outright. The seller receives rental money each week or month, but half of this money is held in escrow and put towards payment of the property purchase. If at the end of the lease period the buyer decides not to proceed with the purchase, then the entire rental money is given to the home owner. The seller then does not lose out at all, as they receive cash as if the house were renting normally. The house can now go back on the market for someone else to buy.
Let s take the example of a $200,000 property. If this property has a monthly rent of $800, then the home owner receives $400 rent per month, and the remaining $400 rent is classed as rent credit and is held in a fund, usually with a real estate agent.
If this lease period is for one year then the rent credit will total $4800. If the seller wishes to proceed with the property purchase, he can deduct $4800 from the total cost of the house, which was $200,000. He can now buy the house for $195,200. A great thing about rent to own is that even if the value of the house had increased to $220,000 after the lease period expired, the buyer would still receive the house at the agreed $200,000 price.
Another element to this method is the non refundable option consideration that the buyer gives to the landlord at the start of the lease. This money gives the buyer the right, but not the obligation, to purchase the house at the end of the lease. If they choose to exercise their option to buy then the money they put down gets subtracted from the purchase price of the house. If they don t, the landlord keeps the money and begins the process again with a new tenant.
The seller does not have to pay tax on the income received from the rent until the house is sold or the rental period finishes. This is because the IRS considers this income as option consideration and as such it is non taxable.
Rent to own is attractive to people who wish to buy a home but do not have sufficient savings to be approved for a home loan. Lenders are now becoming less inclined to lend to people with a bad credit history, and this is another group who are attracted to a rent to buy option.
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